M - Macy's

[Mephistopheles]

 

How much of a threat is Amazon to the top 150 locations and the online/mobile business?  - I think a lot!!!! I didn't appreciate this as much in the past.  But Dept stores are structurally melting ice cubes unless they radically change their gameplan.

 

That's why I like the RE as a margin of safety. How much is 70+ million feet of owned space, 20 million of ground leases and 16 million of distribution centers worth? I'm happy to pay $9 billion in EV and willing to give them a chance as they are fcf positive and paying down debt.

 

There's room for both online and brick and mortar. Many online only companies have opened up stores, there's value in having a physical presence.

 

Take a look at the sales per foot growth and re leasing spreads at SPG and MAC, they're doing well. Is all of the 90 million feet of Macy's space worth a lot? For sure not and a fair amount I'm sure is worthless. But what's the value of Herald Square with or without Macy's? State Street? Union Square? These three together may very well be a third of the enterprise value. Sure Macy's is a fair business at a great price but some of this real estate is the most wonderful retail space in the world at a wonderful price.

 

But that's his point though - right? The high-end RE value is captive as it won't be sold/developed to unlock that potential because those are primarily the locations where the store is doing well and cash flow positive.

 

The low-end stores don't make much money, but typically means they won't be sold for much either as others will struggle where Macy's has.

 

Without a repurposing vehicle like SRG to help rework the properties to a higher use, the real estate isn't worth much. And the value that it does have is a melting ice cube if used to prop up the retail operations as was done at Sears.

 

This is why this didn't work for JCP or for Sears. I'm not saying Macy's stock won't go up from here, but if it does it won't be because of the RE value IMO.

 

Well I was saying under the scenario that Amazon kills even the best Macy's stores, the top 150 as BG2008 assumed. I'm saying in that situation I like the margin of safety provided by the owned real estate. If some day the herald square location stops making money, I'm confident that the building could be sold for significant sums.

[TwoCitiesCapital]

 

How much of a threat is Amazon to the top 150 locations and the online/mobile business?  - I think a lot!!!! I didn't appreciate this as much in the past.  But Dept stores are structurally melting ice cubes unless they radically change their gameplan.

 

That's why I like the RE as a margin of safety. How much is 70+ million feet of owned space, 20 million of ground leases and 16 million of distribution centers worth? I'm happy to pay $9 billion in EV and willing to give them a chance as they are fcf positive and paying down debt.

 

There's room for both online and brick and mortar. Many online only companies have opened up stores, there's value in having a physical presence.

 

Take a look at the sales per foot growth and re leasing spreads at SPG and MAC, they're doing well. Is all of the 90 million feet of Macy's space worth a lot? For sure not and a fair amount I'm sure is worthless. But what's the value of Herald Square with or without Macy's? State Street? Union Square? These three together may very well be a third of the enterprise value. Sure Macy's is a fair business at a great price but some of this real estate is the most wonderful retail space in the world at a wonderful price.

 

But that's his point though - right? The high-end RE value is captive as it won't be sold/developed to unlock that potential because those are primarily the locations where the store is doing well and cash flow positive.

 

The low-end stores don't make much money, but typically means they won't be sold for much either as others will struggle where Macy's has.

 

Without a repurposing vehicle like SRG to help rework the properties to a higher use, the real estate isn't worth much. And the value that it does have is a melting ice cube if used to prop up the retail operations as was done at Sears.

 

This is why this didn't work for JCP or for Sears. I'm not saying Macy's stock won't go up from here, but if it does it won't be because of the RE value IMO.

 

Well I was saying under the scenario that Amazon kills even the best Macy's stores, the top 150 as BG2008 assumed. I'm saying in that situation I like the margin of safety provided by the owned real estate. If some day the herald square location stops making money, I'm confident that the building could be sold for significant sums.

 

Potentially - less massive redevelopment costs.

 

Because if Macy's can't make that location work, what is the likelihood another retailer will want to try? The building would have to be repurposed and that cost will come out of any purchase price.

 

Further, if the proceeds are used to support the remaining retail ops, you're not going to get full credit for the proceeds in the market either.

 

Not saying Macy's is a bad bet here - just saying the RE anchor didn't help JCP nor Sears and I don't understand why I should expect Macy's to be any different.

[BG2008]

TwoCitiesCapital,

 

Well said

[Mephistopheles]

 

 

Potentially - less massive redevelopment costs.

 

Because if Macy's can't make that location work, what is the likelihood another retailer will want to try? The building would have to be repurposed and that cost will come out of any purchase price.

 

Further, if the proceeds are used to support the remaining retail ops, you're not going to get full credit for the proceeds in the market either.

 

Not saying Macy's is a bad bet here - just saying the RE anchor didn't help JCP nor Sears and I don't understand why I should expect Macy's to be any different.

 

Well, I don't know JCP well but regarding Sears, how about Seritage? It's 30 million sq feet selling for $3.6 billion EV. They've been spending well over $100/ft on redevelopment earning 10% unlevered and have a lot more to go in the pipeline. We can agree that Seritage RE needed/needs a lot more redevelopment than Macy's. Its portfolio is also worse quality wise, they don't have flagship downtown stores like Macy's. Not to mention, 50% of the space is currently vacant. SHLD also had many years of multi billion losses which Macy's doesn't need to have. But if you value Macy's (which is a much higher quality portfolio) on the same comps it's a steal. You just need the a leap of faith that management won't become stubborn like Lampert when the time comes.

 

If Macy's can't make the location work then who can? I don't know and I don't know that Macy's can't make it work, the jury is still out. Based on the evidence I see, internet retailers do benefit from brick and mortar locations. And not all segments of the retail industry are doing poorly. Incidentally, Macy's owns what appears to be a solid growing b&m retailer - Bluemercury.

[BG2008]

Mephistopheles,

 

I am moving on to researching companies that are cheap and higher quality.  I just can't spend my time discussing Macy's anymore.  I think the $/sqft metric is flawed.  It works if Macy's will spin out the RE into a separate company and put a competent CEO in there to develop the RE.  In it's current OpCo/PropCo form, I think you assigning value to the sqft is flawed per my previous posts.  Yes, Macy's is higher quality than Sears.  Sears was earning FCF until it abruptly declined.  I don't like investing when I need to trust CEO will liquidate the company and throw in towels.  Americans don't like throwing in the towels. 

 

Yes, there are internet guys who understands retail location has value.  But they are the Warby Parker of the world who takes 1,000 sqft.  The days of a 10,000 sqft Abercrombie is over.  Keep in mind, Herald Square and NYC locations all work on marginal supply/demand.  When you get to 98% occupancy, rent jumps.  When you are hovering at 80%, rent reacts very differently.  I don't know what they will do with Herald Square.  Frankly, I prefer that Herald Square is an empty shell with nothing in it. 

 

This is the last of my post on Macy's just like I said it was going to be my last on CBL and some of the mall spincos a few years ago.  We can really get into a lot of back and forth.  But I've shared my views and I will go hunt for the next higher quality company. 

 

Good luck, I hope you don't need it.

[TwoCitiesCapital]

 

 

Potentially - less massive redevelopment costs.

 

Because if Macy's can't make that location work, what is the likelihood another retailer will want to try? The building would have to be repurposed and that cost will come out of any purchase price.

 

Further, if the proceeds are used to support the remaining retail ops, you're not going to get full credit for the proceeds in the market either.

 

Not saying Macy's is a bad bet here - just saying the RE anchor didn't help JCP nor Sears and I don't understand why I should expect Macy's to be any different.

 

Well, I don't know JCP well but regarding Sears, how about Seritage? It's 30 million sq feet selling for $3.6 billion EV. They've been spending well over $100/ft on redevelopment earning 10% unlevered and have a lot more to go in the pipeline. We can agree that Seritage RE needed/needs a lot more redevelopment than Macy's. Its portfolio is also worse quality wise, they don't have flagship downtown stores like Macy's. Not to mention, 50% of the space is currently vacant. SHLD also had many years of multi billion losses which Macy's doesn't need to have. But if you value Macy's (which is a much higher quality portfolio) on the same comps it's a steal. You just need the a leap of faith that management won't become stubborn like Lampert when the time comes.

 

If Macy's can't make the location work then who can? I don't know and I don't know that Macy's can't make it work, the jury is still out. Based on the evidence I see, internet retailers do benefit from brick and mortar locations. And not all segments of the retail industry are doing poorly. Incidentally, Macy's owns what appears to be a solid growing b&m retailer - Bluemercury.

 

Yes - there is SRG, which remains to be seen how well it turns out. It's been range bound since it's IPO and is operating at a loss while paying premium dollar for liquidity. Further, you have shareholders of Sears now suing to undo the transaction arguing, that in part, it contributed to the bankruptcy and removed assets from creditors' grasp.

 

SRG demonstrates that properties were basically worthless within Sears, and not achieving full value outside of it, AND can take years and a ton of capital before any of that value is unlocked.

 

On top of all of that, Macy's doesn't have an SRG-equivalent so they're still years BEHIND Sears/SRG in that regard.

 

If that's your thesis, just buy SRG and not Macy's.

[Spekulatius]

Agree with above. Plenty of pure play RE players to be had a deep discount. I also second that SRG is showing that  real estate redevelopment is no panacea.

[Mephistopheles]

First of, let me wave the white flag. I was clearly wrong about the equity at $20, regardless of COVID. I was basing on liquidation value, but company wasn't liquidated. Luckily I had sold off some of my position at $16, but not all. Post COVID, I don't see brick and mortar shopping ever returning to prior levels aside from obvious places like Costco, Walmart perhaps. Clearly Amazon has taken advantage of this crisis and they will come out with stronger supply chains and infrastructure, with consumer habits further developed to buy ever greater variety of products online.

 

Having said that, I think the EV >> assets including inventory and RE at depressed prices. I think some of their trophy properties add up to the current EV. Some of their longer dated unsecured debt is selling for 50-60 cents/dollar. All of the debt is unsecured, properties are all unencumbered, and now they have hired Lazard for a restructuring. Probably what will come out of this is they will obtain financing secured by the properties to help them throughout this crisis. They have a liquidity problem.

 

Would anyone be a buyer of the equity or debt on the thesis that they will generate financing to support the capital structure, although it will be higher up on the ladder? Or you wouldn't touch the stuff including the unsecured, at least not until much more depressed prices?